01 February 2008

Sometimes crowds are stupid.

Chad Orzel of uncertain principles reminds us that "The 'point spread' for a football game is set at the level required to get equal numbers of bets on the two teams." Furthermore this is not the consensus of "experts". And since gambling serves as a form of entertainment for a lot of people, there are probably a lot of people that bet on the team they like, not the team they think will beat the spread. So you can't even say that the "wisdom of crowds" applies in situations like this. Sometimes crowds are stupid, especially when they have an emotional stake in the matter. (And not just in sports betting! Consider the current housing bubble, or the dot-com bubble.)

And it's not entirely clear that bookies even always act in the way Orzel says they do; they act to maximize their expected profits, which turns out to not be the same. (See Steve Levitt's paper for more detail.) Not surprisingly, this means there's a winning strategy for betting on football, or at least it looks like there is -- bet on home underdogs, or so Levitt says. (They tend to be undervalued.) I'd do it, but I'm pretty risk-averse when it comes to my own actual money, as opposed to other people's expected-value money.

1 comment:

Anonymous
said...

Speaking of optimization, and encoding of things. The zeroth order rule is for the bookie to ensure that bet volume is equal on both sides of the line.

It would be interesting to calculate the amount of information that a single bet from 'expert' bettor might have, or how much information is contained in the composition of the betting population of each side of the action.

That being said, there are systematic betting biases that are exploited (irrational exuberance, heheh) by the oddsmakers exploit. So, it's not always their desire to book equal sides of the action.